Mortgage Denied? Here Are Some Possible Reasons

Getting a mortgage just keeps getting tougher, and many homebuyers are getting rejected for loans they could easily afford.

The issue: Tighter standards from Fannie Mae and Freddie Mac, the government entities that back mortgages made by banks.

A quarter of all mortgage loan applicants get denied for loans, according to the Federal Reserve. Many other potential homebuyers never even try to get loans.

Here are some of the reasons banks must turn down borrowers for mortgages:

Too few of the condos in your association have been sold

For Fannie/Freddie lenders to approve a mortgage to finance purchase of a condo, a large majority of the units — 70% — have to be already sold or under contract to individuals. Before 2009, the threshold was 51%.

If more than 30% are still owned by the company that built the complex or sponsored its conversion from rental units, the mortgage will be denied, no matter how qualified the buyer is.

Your debt is too high

Fannie and Freddie have also increased their emphasis on income relative to debt.

If someone’s total debt payments exceed 45% of income, the mortgage will be denied. In 2009, the limit was 55%.

Using that as a hard and fast rule can penalize very qualified buyers, ones who should be able to meet their debt obligations.

Take, for example, a couple who wants to buy a second home as a rental. Two mortgage payments could easily push them past the 45% threshold, even though they’ll have rental income and home equity.

The 45% rule can also hurt small business owners who have had a couple of bad years. Their incomes may be down relative to their debt, but they may have plenty of cash to keep from defaulting on a mortgage.

Missed payments on credit card debt

Fannie and Freddie also have gotten stricter in how they factor in missed payments on credit cards, auto loans and other debts in which the balances do not have to be paid off every month.

They used to be okay with a missed payment or two. Now, one missed payment will hit your debt-to-income ratio, because banks will add 5% of your outstanding loan balance to the debt part of the calculation.

That would be an extra $1,000 on a $20,000 student loan balance, for example.

The wait after foreclosure is extended to seven years from five

Some borrowers lost homes to foreclosure but then diligently rebuilt their financial health. Despite high credit scores, ample assets and income and steady employment, lenders are not allowed to finance their Fannie/Freddie mortgages if their foreclosures happened any time within the past seven years.

Before spring last year, the wait time was five years.

Of course, there may be other factors that cause a lender to deny you for a mortgage, but these are the basic deal-killers.

Talk to a lender and get pre-approved before even starting the home search process, and you may save yourself and your real estate agent a lot of wasted time if you’re not going to qualify any way.